In ECB's 2020 vision, inflation goal elusive

12/14/2017

Tell your friends

The European Central Bank upgraded its growth and inflation forecasts for the coming years Thursday but stood by its massive support to the economy, with President Mario Draghi saying it wont reach its cherished price growth target by 2020.

"Even though the situation on growth has improved and will continue to improve... the news on inflation remains somewhat muted," Draghi told journalists in Frankfurt after a gathering of central bank governors.

Growth is expected to hit 2.4 percent in 2017, 2.3 percent next year and 1.9 percent in 2019.

The ECB fired off a broadside of policies in recent years to stoke price growth, offering cheap loans to banks, fixing interest rates at historic lows and buying tens of billions of euros in government and corporate bonds per month.

Such measures are designed to pump cash through the financial system and into the real economy of businesses and households, powering economic growth and inflation.

But price growth will slow from 1.5 percent this year to 1.4 percent in 2018, rising only to 1.7 percent in 2020 -- still short of the ECB's target of 2.0 percent, judged to be most favourable to growth.

That has encouraged the central bank to keep its support for the 19-nation single currency area in place.

It decided in October to slash its bond purchases by half from January, to 30 billion euros ($35.4 billion) per month -- but has left itself the option of extending the programme beyond a September 2018 deadline or increasing its monthly spend if inflation falls back.

"It seems as if the ECB still does not yet believe that strong growth will eventually translate into higher inflationary pressure," ING Diba bank analyst Carsten Brzeski said.

The ECB's decisions fell on the same day as the Bank of England left its key interest rate unchanged at 0.50 percent as the British economy battles Brexit headwinds.

Meanwhile, the US Federal Reserve on Wednesday increased its key lending rate to 1.25-1.5 percent as the labour market heated up, although inflation remains elusive there too.

Long and winding road

Like other central banks, the ECB is puzzling over why rising growth and employment figures are not pushing up wages -- the "linchpin" of higher inflation, Draghi said earlier this year.

The eurozone clocked up 0.6-percent quarter-on-quarter growth between July and September, and unemployment has fallen to 8.8 percent -- its lowest level since January 2009.

Nevertheless, price growth in the single currency zone hit just 1.5 percent in November.

"The muted response of wages to improving conditions in the labour market... is way slower than we had in the past," Draghi said Thursday.

"That cautions us from making bold statements" about inflation being on its way back to normal levels, he added.

Inflation will fall back over the coming months -- mainly a statistical effect as the trough in oil prices last winter falls out of year-on-year comparisons, Draghi said -- before rising again in the spring.

Meanwhile, hinting at cutting bond-buying further or raising rates could boost the euro against other currencies, braking inflation by making imports cheaper and slowing economic growth by increasing prices for eurozone products abroad.

But looking ahead to next year "pressure on the ECB to step up its tapering (gradually reducing stimulus) process could increase, from both the outside and the inside" among European politicians and the bank's own governing council members, Brzeski said.

Draghi and his supporters are likely to remain obstinate in seeing their course of treatment for the once-ailing eurozone through to its end.

"Over the past years, the ECB has been the chief physician, getting the patient into rehab and making him walk again with monetary crutches... only once the patient is able to sprint an entire marathon will the crutches come off," Brzeski predicted.